1031 Expert -- 1031 exchange using a related entity - plz help

[Shane H.]

Hello 

I presently have a duplex under contract and am hoping it will close sometime in December.  I'm planning to 1031 the sale into another property.

My ideal situation is to 1031 this duplex into a new construction  duplex.

Question is how do I do it?  I've already been approved for a construction loan and I own the lot.  Here are the details.

Duplex Im selling is owned in entity "A LLC" which is a 2 member LLC and I'm a 50% member, other member is my dad.

Ive been approved for a construction loan based on the financials of entity "A LLC" - however I could also get the construction loan in my name only, or another single member LLC that I am sole member of or Entity "B LLC" which I'm a 50% member of or when I close it down can transfer ownership to me solely.

The land is owned free and clear - land is owned under entity "A LLC" and is also owned half by John Smith (friend of mine...John Smith who coincidentally wants out)

How do I do this...I've been reading up on related entity exchanges but as I type this out am wondering if I couldnt complete this since the lot is owned by entity "A LLC" which is also selling the existing duplex.

Disclaimer for any that answer - I understand you are giving advice and I am to complete my own due diligence and consult my own professionals.

Thanks!!!!

(Other option I'm wondering is I just moved out of what was my primary residence for the past 11 years and will be buying a new house. Could I sell my primary residence owned solely by me - to Entity "A LLC" (which I'm a 50% member) as part of a 1031 exchange?

[Dave Foster]

I love a complicated scenario don't you @Michael Plaks?

@Shane H., The central basic issue that can't be overcome with your scenario is that A LLC already owns 50% of the land. You cannot exchange for improvements on land you already own. And since A LLC is selling the relinquished property then it must also purchase the new property.

If A LLC did not own 50% of the new property then a reverse construction exchange would be appropriate. But with it's current ownership that's not going to work.

However, I think the option that you have is to sell the old property as A LLC and then purchase as part of your 1031 the 50% owned by JS. That then puts all of the land in LLC and lets you proceed with construction. It also eats up part of your 1031 and leaves you with the remainder to purchase a second property.

Some shotgun thoughts.

1. If JS was willing to sell on a note that would defer some tax for him and let you purchase the land with no down so you could wrap all into a construction-perm loan.  That would eat up debt reinvestment requirement and leave the cash for the second purchase.

2. JS could also sell and do his own exchange as long as he is a TIC owner with A LLC of the land which I think he is.

3. Don't forget that the critical thing is that your exchange be in place at the closing of the sale.  You'll have some time after that to sort things out to everyones satisfaction.

4. I like your thinking even if it's from a Shocker (I'm from Manhattan what can I say).